Espinoza, Venice R.

Group 5 TTH (9:00-10:30)

January 23, 2020
Governance comprises all of the processes of governing – whether undertaken by the
government of a ​state​, by a ​market or by a ​network – over a ​social system (​family​, ​tribe​, ​formal
or ​informal organization​, a ​territory or across territories) and whether through the ​laws​, ​norms​,
power or ​language of an organized society. It relates to "the processes of interaction and
decision-making among the actors involved in a collective problem that lead to the creation,
reinforcement, or reproduction of ​social norms and ​institutions​". ​In lay terms, it could be
described as the political processes that exist in and between formal institutions.

Governance is also the establishment of policies, and continuous monitoring of their proper
implementation, by the members of the governing body of an organization. It includes the
mechanisms required to balance the powers of the members (with the associated accountability),
and their primary duty of enhancing the prosperity and viability of the organization.

Corporate governance is the ​system of rules, practices, and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of a
company's many ​stakeholders​, such as shareholders, senior management executives, customers,
suppliers, financiers, the government, and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it encompasses practically every
sphere of management, from action plans and ​internal controls to performance measurement and
corporate ​disclosure​. The board of directors is the primary direct stakeholder influencing
corporate governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company. The board is tasked with making
important decisions, such as corporate officer appointments, executive compensation, and
dividend policy. In some instances, board obligations stretch beyond financial optimization, as
when shareholder resolutions call for certain social or environmental concerns to be prioritized.

Organizational governance is so important to modern business practices that it even ​has its own
ISO definition — the international standard on social responsibility, ISO 26000, defines
organizational governance as “a system by which an organization makes and implements
decisions in pursuit of its objectives.” In other words, organizational governance drives the
modern organization. That being the case, organizations need strong and robust entity data on
which to base those decisions. Well-governed organizations provide their leaders with good
quality information to help them ask the right questions and take the right decisions. That good
quality information needs to come from somewhere, and increasingly modern governance is
driven by entity and board management software that creates a ​central repository for governance
data​, ensuring that there’s a single source of truth for those making decisions — both the big
strategic ones and the smaller day-to-day operational ones.
The Key Corporate Governance Mechanism:

Board of Directors
A board of directors protects the interests of a company’s shareholders. The shareholders use the
board to bridge the gap between them and company owners, directors and managers. The board
is often responsible for reviewing company management and removing individuals who don't
improve the company’s overall financial performance. Shareholders often elect individual board
members at the corporation’s annual shareholder meeting or conference. Large private
organizations may use a board of directors, but their influence in the absence of shareholders
may diminish.

Audits
Audits are an independent review of a company’s business and financial operations. These
corporate governance mechanisms ensure that businesses or organizations follow national
accounting standards, regulations or other external guidelines. Shareholders, investors, banks and
the general public rely on this information to provide an objective assessment of an organization.
Audits also can improve an organization’s standing in the business environment. Other
companies may be more willing to work with a company that has a strong track record of
operations.

Balance of Power
Balancing power in an organization ensures that no one individual has the ability to overextend
resources. Segregating duties between board members, directors, managers and other individuals
ensures that each individual’s responsibility is well within reason for the organization. Corporate
governance also can separate the number of functions that one division or department completes
within an organization. Creating well-defined roles also keep the organization flexible, ensuring
that operational changes or new hires can be made without interrupting current operations.

Shareholder VS. Stakeholder Model

Shareholders are always stakeholders in a corporation, but stakeholders are not always
shareholders. A shareholder ​owns part of a public company through shares of stock, while a
stakeholder has an interest in the performance of a company for reasons other than stock
performance or appreciation. These reasons often mean that the stakeholder has a greater need
for the company to succeed over a longer term.
Understanding the Role of the Shareholder
A shareholder can be an individual, company, or institution that owns at least one share of a
company and therefore has a financial interest in its profitability. For example, a shareholder
might be an individual investor who is hoping the stock price will increase because it is part of
their retirement portfolio. Shareholders have the right to exercise a vote and to affect the
management of a company. Shareholders are the owners of the company, but they are not liable
for the company’s debts. For private companies, ​sole proprietorships​, and partnerships, the
owners are liable for the company's debts. A sole proprietorship is an unincorporated business
with a single owner who pays personal income tax on profits earned from the business.

Understanding the Role of the Stakeholder

Stakeholders can be:

● owners and shareholders

● employees of the company
● bondholders​ who own company-issued debt
● customers who may rely on the company to provide a particular good or service
● suppliers and vendors who may rely on the company to provide a consistent revenue
stream

Although shareholders may be the largest type of stakeholders, because shareholders are affected
directly by a company's performance, it has become more commonplace for additional groups to
also be considered stakeholders.

Key Differences
A shareholder can sell their stock and buy different stock; they do not have a long-term need for
the company. Stakeholders, however, are bound to the company for a longer term and for reasons
of greater need.

For example, if a company is performing poorly financially, the vendors in that company's
supply chain might suffer if the company no longer uses their services. Similarly, employees of
the company, who are the stakeholders and rely on it for income, might lose their jobs.
In the ​public sector, governance is a combination of processes that a board implements to
manage and monitor the organization's activities in achieving its objectives. Basically,
governance is the means by which goals are determined and accomplished. There is a code of
conduct implemented to ensure appropriate behavior and establish credibility. This is not just
limited to corporations; governance in the public sector, like a public school, is equally
important.

Good governance in the public sector is the cornerstone for efficient and effective organisational
performance and is underpinned by a number of accountability requirements. Systems and
structures for governance need to be supported by effective leadership and organisational culture.

Public governance refers to the formal and informal arrangements that determine how public
decisions are made and how public actions are carried out, from the perspective of maintaining a
country’s constitutional values when facing changing problems and environments. The principal
elements of good governance refer to accountability, transparency, efficiency, effectiveness,
responsiveness and rule of law. There are clear links between good public governance,
investment and development. The greatest current challenge is to adapt public governance to
social change in the global economy. Thus the evolving role of the State needs a flexible
approach in the design and implementation of public governance.

Public governance is important for investors and their businesses. It helps build trust and
provides rules and stability needed for planning investment in the medium and long term. It
facilitates a smooth and productive interaction between the State and the general public, no
longer based on rigid traditional “control and command” approaches, but on flexibility,
guidance, communication and persuasion. Public governance is currently more participative and
transparent. Regulatory clarity and certainty are valued by businesses and citizens. Innovative
mechanisms to monitor and evaluate public management are commonly used to improve
transparency and build credibility, important determinants of investment.